Dan Ritter for Wall St CheatSheet / USA Today writes: The start of a new calendar year is a busy time in the world of personal finance. For the most part, as far as the Internal Revenue Service
is concerned, what happened in 2013 will stay in 2013 — 2014 is a new
year, and households often take the time to balance holiday-stretched
budgets and plan for the new year.
Unless you are already
comfortably retired (and if so, congratulations!), it is probably worth
your while to plan your finances, in particular your contributions
toward retirement. If you don't have a clear strategy, perhaps now is
the time to develop one. If you do, it is always wise to make sure that
it is effective and efficient and that you are executing it well.
A
top consideration when you sit down to do all this strategizing is how
severely Uncle Sam is going to hit you with the tax bat. First, stay up
to date on your tax bracket so you know what to expect come year's end.
Second, make sure you are taking deductions where you earn them. Believe
it or not, the government wants to incentivize smart financial
behavior, and the more savvy you are with your retirement savings, the
more tax advantages you can receive.
Here are a few things to get you started.
1. 401k — if you have it, use it
A 401k
has several valuable benefits, and one of the best is that it can be
funded with pre-tax earnings. That is, when you elect to have part of
your paycheck deducted and contributed directly to a 401k, this part of
your salary isn't counted toward your taxable income at the end of the
year.
What this means is that your contributions to the plan
aren't subject to most federal or state taxes (there's little escape
from earned income taxes such as payroll and Social Security, which you
will still be pinged for), effectively lowering your total taxable
income. Keep in mind that you receive this tax benefit each time a 401k
contribution is deducted from your paycheck, so you don't take a formal
deduction on your tax return for the sum of your contributions.
401k
contributions can have an effect on your take-home pay, as well. If
your employer withholds money from your paycheck for federal income
taxes, that withholding is based on your expected taxable income. Since
your expected taxable income is reduced to below your actual salary when
you contribute to a 401k, the withholding will be smaller.
There are online calculators available if you want to get an idea of how a contribution to a 401k could affect your paycheck.
Remember
that contributing to a traditional 401k is only a temporary tax
windfall, and that taxes will be levied on funds withdrawn from the
account. 401k contributions will be limited at $17,500 per year for
people younger than 50, while those older than 50 may contribute up to
$23,000.
2. If you don't have a 401k, open an IRA
If you don't have access to a 401k account, you should definitely consider an IRA — an individual retirement account.
There are some important conditions that apply in order to be eligible
to contribute to an IRA, but for the most part, if you are under the age
of 70.5 years old and you earn a reported income from your employer,
you can open an IRA with any number of financial institutions.
An
IRA works like a 401k in that your contributions will, pending certain
conditions, lower your taxable income (you will still be subject to
earned income taxes like payroll and Social Security regardless of IRA
contributions). The annual limit on contributions to an IRA for those
younger than 50 is $5,500 and $6,500 for those older than 50.
The
amount you will be able to deduct depends on a number of factors. For
example, in 2014, you will not get an IRA contribution deduction if you
are a single adult or a head of household who has a workplace retirement
plan and has an adjusted annual gross income of between $60,000 and
$70,000.
There are a number of conditions that apply to the
eligibility of IRA contributions for deduction, but there's a good
chance that if you don't have access to a retirement plan through work,
opening an IRA could make your financial life much easier.
For the
record, you can often still contribute to an IRA even if you have a
work-sponsored retirement savings plan, but your contributions may not
count toward a tax deduction. The IRS has tons of literature on the
limits.
3. The saver's credit
When
it comes to saving for retirement, one of the biggest problems facing
most Americans is that they simply don't have enough money to put away.
Millions of Americans live paycheck to paycheck, and the idea of setting
aside 10 or even 5 percent of their income for retirement is simply not
feasible.
The IRS has afforded additional tax credits for those
with lower income. If you are single filer with income up to $30,000 and
you make eligible contributions to a qualified retirement savings
account, you can earn a tax credit worth a percentage of your
contribution. The percentage depends on your income — the less you make,
the greater it is.
For households, the income limit is $60,000
per year, and for heads of households, the income limit is $45,000 per
year. The compelling thing about this tax credit is that it stacks with
the tax advantages offered by traditional savings vehicles.
Wednesday, January 1, 2014
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